RBI panel wants banks to sell multiple insurance products

Says banks can sell 25% of group products for 5 yrs

The panel constituted by the Reserve Bank of India (RBI) to look into issues

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regarding banks becoming insurance brokers is likely to propose that banks be given two options -- to become multiple corporate agents or insurance brokers.

The working group has also suggested that no model should be imposed on banks and that the choice of becoming a multiple corporate agent or a broker should be left to the respective banks and their boards.

Financial Chronicle has a copy of the report, circulated by the RBI working group among its members for their feedback.

Several banks at their meeting with the central bank and the insurance regulator had expressed reservations about a clause in the broker regulations of the Insurance Regulatory and Development Authority (IRDA), which said not more than 25 per cent of the insurances handled by an insurance broker (read bank) in any financial year should be placed with the insurance company within the promoter group separately for life and general insurance business.

With most banks such as SBI, ICICI, Canara Bank, Punjab National Bank, Union Bank, Allahabad Bank, Bank of Baroda distributing insurance products of their own subsidiaries this clause was difficult to follow.

As a result, the report of the working group has said the IRDA should amend the regulations to give five years to a bank to reach the 25 per cent cap on the insurance business placed with the insurance company of the promoter group required by IRDA.

The report said by the end of the first year of operations a maximum of 75 per cent of the insurance business could be placed with the group insurance company. At the end of the second year of operations, this should decrease to 60 per cent; end of third year a maximum of 50 per cent; end of fourth year a maximum of 35 per cent; and a bank should achieve the 25 per cent cap by the end of the fifth year.

Citing the example of Hong Kong, which has a successful multiple corporate agency model (one bank allowed to sell policies of many insurers), the report said to begin with, a bank might be allowed to tie up with two life, two non-life and two health insurance companies.

Under the existing insurance regulations, a bank is allowed to

distribute policies of one life and one non-life insurer as its

corporate agency partner.

The working group is of the opinion that no single model will be

appropriate for the type of banks operating in India. They range from

large public sector banks to private sector banks, foreign banks, to

cooperative banks (large and small) to regional rural banks. All have

their distinctive characteristic structures and will need different

models of bancassurance to operate.

"To meet the expectations of all stakeholders and also to ensure that

the bank branches are effectively utilised for marketing of insurance

business thereby increasing penetration and the customer also gets the

choice of products, the committee is of the opinion that along with

the current corporate agency model, banks should be allowed to have

any one of the following models -- multiple corporate agency model

(one bank allowed to sell policies of many insurers and broking

model," said the RBI panel report.

MV Tanksale, chief executive of Indian Banks Association (IBA) and a

member of the RBI panel, told Financial Chronicle, "RBI is the

convener of the working group and we have not submitted the report to

RBI yet. Therefore, I cannot discuss anything about the report. A copy

of the report was circulated to the members to get their feedback."

The group said banks that want to go for the broking model might do so

as per the regulations released by IRDA and what RBI is expected to

release shortly.

Among other measures suggested to increase the insurance penetration,

the working group has observed that public sector behemoth Life

Insurance Corporation of India (LIC) has tieup with 42 banks as

corporate agents, of which only a couple of banks actually mobilise

insurance business.

The business mobilised by LIC through bancassurance is miniscule (less

than 5 per cent) to its total business generated and also in the total

bancassurance sector individually.

"Hence there is a scope for having more than 40 banks from this tieup,

who can adopt either broking or multiple corporate agency model to

offer the products/services of other insurance companies. This will

help increase penetration," said the report.

The report has also suggested that cooperative banks and regional

rural banks that have big presence in rural areas are not leveraged

much to do insurance business. Efforts should be made to enable them

to tie up with insurance companies.

The group has also suggested amending the clause requiring banks

becoming insurance brokers to place exclusive staff or qualified

person in each and every branch of the broker (read bank). The working

group said such a clause would deter a lot of banks from broking

business as getting exclusive persons to do this business in banks

would involve fresh recruitment or carving out staff from existing

system which may not be cost effective.

There are nearly 55,000 bank branches that have never sold a life

insurance policy. Many banks, which have started their own insurance

firms, have refused to become brokers for other insurers. They would

rather function as corporate agents of their own insurance companies.

Finance minister P Chidambaram, in his annual budget speech in

February 2013, had said banks would be permitted to act as insurance

brokers for marketing and selling of insurance policies, thereby

increasing insurance penetration.

Following this, the IRDA came out with gazette notification, dated

July 19, 2013, defining the procedure for banks to become insurance

brokers, as well as their obligations and responsibilities.

Subsequently, the RBI in November 2013 came out with draft regulations

for banks becoming brokers.

On December 20, 2013, the department of financial services issued a

circular instructing all public sector banks to start the process of

becoming insurance brokers by January 15, 2014.

The main reasons cited in the finance ministry circular were that the

broker model would increase insurance penetration in the country by

utilising untapped bank branch network in the country, prevent

misselling or forced selling and would make products most suitable for

customer needs.

Banks had their reservations on becoming insurance brokers and

expressed the same to the IRDA and RBI. Taking into consideration the

reservations expressed by banks, the RBI on January 27 called for a

meeting of heads of all banks and the chairman and officials of IRDA.

Another meeting followed this with secretary financial services in the

finance ministry and banking officials to find a solution. Following

up on these meetings, a panel was constituted as per the directions of

the RBI, and included representatives from IRDA, RBI, banks and Indian

Banks Association, to look into the concerns of banks about getting

into broking business. It was also mandated to recommend the requisite

model for banks to enable them to have multiple insurance

relationships, which would be acceptable to all.

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